Actuarial Financial Math
Q&A
Arbitrary - answer-Based on random choice or personal whim
Arbitrage - answer-Simultaneously buying and selling securities, etc. in different
markets to take advantage of differing prices
Random - answer-Chosen without method (without bias)
Non-random - answer-Chosen with method (bias)
Deterministic - answer-Inevitable consequence
Non-deterministic - answer-Unpredictable situation
Standing assumptions - answer-1) NO ARBITRAGE!
2) Shares of stock and monetary amounts can be subdivided into arbitrary amounts for
sale and purchase.
3) There is one prevailing interest rate, the same for everyone and the same for both
lending and borrowing.
4) Everyone has an in
, nite line of credit.
Conventions? - answer-Unless explicitly stated otherwise:
1) Stocks do not pay dividends.
2) The purchase price for any asset is the same as the selling price, i.e., there is no bid-
ask spread.
3) There are no transaction costs.
4) Options are European.
What is a derivative? - answer-An agreement between 2 people that has a value
determined by the price of something else
Kind of like the bet on the price of something
Serves as hedging
Uses for Derivatives - answer-1) Risk management
2) Speculation
3) Reduced transaction costs
4) Regulatory arbitrage
What is Hedging? - answer-A risk management strategy used in limiting or offsetting
probability of loss from fluctuations in the prices of commodities
What are Catastrophe Bonds? - answer-Risk-linked securities that transfer a specified
set of risks from a sponsor to investors
An insurance company issues bonds through an investment bank, which are then sold
to investors. These bonds are inherently risky. If no catastrophe occurred, the insurance
company would pay a coupon to the investors, who made a healthy return. On the
contrary, if a catastrophe did occur, then the principal would be forgiven and the
insurance company would use this money to pay their claim-holders
Notation for Price of an Underlying Asset - answer-S(T)
Q&A
Arbitrary - answer-Based on random choice or personal whim
Arbitrage - answer-Simultaneously buying and selling securities, etc. in different
markets to take advantage of differing prices
Random - answer-Chosen without method (without bias)
Non-random - answer-Chosen with method (bias)
Deterministic - answer-Inevitable consequence
Non-deterministic - answer-Unpredictable situation
Standing assumptions - answer-1) NO ARBITRAGE!
2) Shares of stock and monetary amounts can be subdivided into arbitrary amounts for
sale and purchase.
3) There is one prevailing interest rate, the same for everyone and the same for both
lending and borrowing.
4) Everyone has an in
, nite line of credit.
Conventions? - answer-Unless explicitly stated otherwise:
1) Stocks do not pay dividends.
2) The purchase price for any asset is the same as the selling price, i.e., there is no bid-
ask spread.
3) There are no transaction costs.
4) Options are European.
What is a derivative? - answer-An agreement between 2 people that has a value
determined by the price of something else
Kind of like the bet on the price of something
Serves as hedging
Uses for Derivatives - answer-1) Risk management
2) Speculation
3) Reduced transaction costs
4) Regulatory arbitrage
What is Hedging? - answer-A risk management strategy used in limiting or offsetting
probability of loss from fluctuations in the prices of commodities
What are Catastrophe Bonds? - answer-Risk-linked securities that transfer a specified
set of risks from a sponsor to investors
An insurance company issues bonds through an investment bank, which are then sold
to investors. These bonds are inherently risky. If no catastrophe occurred, the insurance
company would pay a coupon to the investors, who made a healthy return. On the
contrary, if a catastrophe did occur, then the principal would be forgiven and the
insurance company would use this money to pay their claim-holders
Notation for Price of an Underlying Asset - answer-S(T)
